Retail Sales: A holiday hangover or something more sinister

Despite mixed economic data, Wall Street traders remained optimistic, driving stocks and bonds higher ahead of the next inflation reading( PPI), which is expected to help define the Federal Reserve's future actions better.

Even without the support of the Mag 7, the S&P 500 came close to reaching a new record high. Investors had been worried about an overheating consumer market, but their concerns were somewhat relieved by falls in retail sales. This decline followed fears sparked by a higher-than-expected inflation report earlier in the week. Additionally, bond yields have decreased, indicating that the market expects the Federal Reserve to introduce further easing measures in 2024. According to Fed swaps, June is fully priced for a potential rate cut.

The recent deceleration in U.S. retail sales can be interpreted as either bad news or good news, depending on one's perspective. On the one hand, it reflects a notable slowdown in nominal spending, marking the weakest reading on retail sales in 10 months. This deceleration raises questions about the resilience of the U.S. economy, particularly in light of recent data suggesting sustained strength despite efforts by the Federal Reserve to temper economic activity.

And through the Fed policy lens, weaker-than-expected retail sales figures may help alleviate concerns about the Fed remaining in "higher for longer" mode. Still, as notably, Thursday's data also included revisions to previous months' retail sales figures. These revisions revealed that December's spending impulse was less robust than initially reported, and November's gain was revised away entirely. With the series now showing a decline in three of the last four months, the overall trend in retail sales appears less favourable than previously believed.

While "severe weather" may be cited as a contributing factor to the overall decline, it's worth noting that this explanation doesn't jive entirely with the positive performance of restaurant sales during the same period. The sluggish retail figures could be attributed to a "holiday hangover" or 'payback effect" as consumer spending patterns adjust after the festive season. Whatever the take, it unambiguously serves as a relief valve following the warmer inflation reading earlier in the week, which caused traders to reduce the likelihood of an immediate rate cut by the Fed.

In what is seemingly becoming a regular occurrence, Jobless claims undershot. Initial claims fell 8,000 to 212,000 in the week of February 10. Consensus expected 220,000. However, continuing claims for the prior week were 1.895 million, up 30,000 and ahead of estimates. Sure, you can paint a possible recession landscape with ongoing claims. Still, the initial filers series points to an overly robust labour market, and that's the narrative that'll prevail until the NFP headline suggests otherwise.

Thursday's data painted a nuanced picture of the American consumer landscape. Despite facing a staggering $1.13 trillion in high-interest credit card debt and rising delinquency rates, January's data hinted at potential consumer retrenchment. This decrease may be reflected in the mixed performance of retail sales, with only a handful of categories showing gains and ongoing concerns about consumer spending patterns.

However, amidst these challenges, there remains scant evidence of significant deterioration in the U.S. labour market. While subject to fluctuations, initial jobless claims indicate ongoing resilience and stability, suggesting that the labour market has not yet experienced significant disruptions.

The juxtaposition of these factors underscores the complex and constantly mixed dynamics at play within the U.S. economy, adding to the challenges of forecasting the timing and pace of the widely expected Fed cuts in 2024.

Investors are now bracing for another round of inflationary scrutiny, especially coming fast on the heels of a warmer CPI. While some may have anticipated a more pronounced reaction in the rates market to a slow start to the year from U.S. retail and manufacturing, the focus remains on inflation metrics.

The upcoming PPI report is expected to be closely watched by market participants, as it typically offers crucial insights into inflationary pressures at the producer level. The PPI measures the average change in selling prices received by domestic producers for their output and is widely regarded as a leading indicator of consumer inflation trends.

On Tuesday, recall, Lael Brainard sought to place some of the blame for lingering inflation on corporate greed. "If you look at some of the staples, like eggs or milk, they have come down. But consumer brands, instead of lowering prices, have shrunk packaging," she told CNBC, referring to Joe Biden's new favourite macro buzzword: "Shrinkflation."